Feature Value Investing Weekly

13 Companies in the Spotlight This Week – 10/4/14

image (7)We evaluated 17 different companies this week to determine whether they are suitable for Defensive Investors, those unwilling to do substantial research, or Enterprising Investors, those who are willing to do such research. We also put each company through the ModernGraham valuation model based on Benjamin Graham’s value investing formulas in order to determine an intrinsic value for each. Here’s a summary of the ModernGraham Valuations. To see a listing and screenings of all the valuations, be sure to sign up to be a premium subscriber!

The Elite (Defensive or Enterprising and Undervalued)

Motorola Solutions Inc. (MSI)

Motorola_solutions_logoMotorola Solutions Inc. is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has numerous concerns regarding the lack of earnings stability or growth over the last ten years, the unstable dividend history, and the high PEmg and PB ratios.  The company passes all of the Enterprising Investor’s requirements, though.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $1.92 in 2010 to an estimated gain of $2.73 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 6.99% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (Read the full valuation)

National Oilwell Varco (NOV)

National_Oilwell_Varco_Logo.svgNational Oilwell Varco qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only initial concern is the short dividend history while the company passes all of the Enterprising Investor’s requirements. Consequently, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.88 in 2010 to an estimated $5.53 for 2014, an overall growth rate of around 8.55% annually. National Oilwell Varco’s growth in its EPSmg demonstrates a long-term trend in the company’s earnings, a sight that value investors love to see. Overall, EPSmg has grown in each of the last five years, and it should be expected that growth will continue into the future. This level of demonstrated growth outpaces the market’s implied estimate of 2.81% earnings growth.  The ModernGraham valuation is based on an estimate of growth of 6.41%. As a result, it is clear that the market’s current pricing of National Oilwell Varco may be low, and therefore the ModernGraham conclusion is the company appears to be undervalued.  (Read the full valuation)

Rockwell Automation Inc. (ROK)

220px-Rockwell_Automation_logo.svgRockwell Automation is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the high PEmg and PB ratios, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.91 in 2010 to an estimated $5.33 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 6.33% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (Read the full valuation)

TJX Companies (TJX)

tjx_logoTJX Companies is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the low current ratio and the high PEmg and PB ratios while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.30 in 2011 to an estimated $2.71 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 6.76% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (Read the full valuation)

Twenty-First Century Fox Inc. (FOXA)

220px-21st_Century_Fox_logo.svgTwenty-First Century Fox qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the low current ratio, the lack of earnings stability over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor’s only initial concern is the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.55 in 2010 to $1.64 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 6.23% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (Read the full valuation)

The Good (Defensive or Enterprising and Fairly Valued)

C.R. Bard Inc. (BCR)

C.R. Bard Inc. qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the high PEmg and PB ratios.  The Enterprising Investor’s only initial concern is the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.53 in 2010 to an estimated $7.17 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 5.96% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (Read the full valuation)

J.M. Smucker Company (SJM)

J.M. Smucker Company qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor’s only initial concern is with the low current ratio while the Enterprising Investor’s only issue is the high level of debt relative to the net current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.68 in 2011 to an estimated $5.25 for 2015.  This level of demonstrated growth supports the market’s implied estimate of 5.14% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.  (Read the full valuation)

Olin Corporation (OLN)

Olin Corporation remains a company worthy of further research by both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only official initial concern is the low level of earnings growth over the last ten years. The earnings grew only from an average of $1.79 to an average of $1.83 during that time period, well below the Defensive Investor’s requirement. In addition, the Defensive Investor would like to see more growth in the dividend, which has not risen for over ten years.  The Enterprising Investor’s only concern is the level of debt relative to the net current assets, but the company has shown sufficient growth and stability over the last five years to satisfy the less conservative investor’s needs. As a result, both Defensive Investors and Enterprising Investors should feel comfortable proceeding with research into the company and comparing it to other companies.  The intrinsic value of the company falls within a margin of safety in relation to the price, so the company appears to be fairly valued at this time. The company has shown a level of earnings growth of around 5.76%, having grown its EPSmg (normalized earnings) from $1.46 in 2010 to an estimated $1.89 for 2014. ModernGraham estimates continued growth of around 4.32%, having lowered the historical growth by a margin of safety, and the market is implying a growth rate of only 2.58%. As a result, investors are encouraged to consider Olin to be fairly valued and feel comfortable discussing some of the qualitative aspects of the company and its management.  (Read the full valuation)

Raytheon Company (RTN)

Raytheon Company qualifies for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only initial concern is the low current ratio and the company passes all of the Enterprising Investor’s requirements.  As a result, value investors  following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.36 in 2010 to an estimated $6.05 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 3.92% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.  (Read the full valuation)

Western Digital Corporation (WDC)

Western Digital appears to be a solid opportunity for purchasing a great company at a good price. The Defensive Investor has few concerns, and in fact is only disappointed by the company’s short dividend history. The Enterprising Investor is likewise situated, and has no initial concerns. Over the last ten years, the company has seen its EPS grow from an average of $1.72 to an average of $5.75, indicating a high level of long-term growth that pleases the Defensive Investor.  Overall, the company is rated as fairly valued by the ModernGraham model, which looks primarily at the company’s growth in EPSmg (normalized earnings). EPSmg has gone from $3.75 in 2010 to $5.41 for 2014, leading to an average growth of nearly 8.9% each year. The valuation model utilizes a built-in safety margin by reducing that growth rate to 6.65% in order to forecast growth over the next 7-10 years, and that rate is above the market’s current forecast of only 4.67%. Based on the ModernGraham forecast for growth, the model returns an estimate of intrinsic value of $117.92, which falls within a margin of safety relative to the current price of around $96.50. Value investors are therefore encouraged to proceed with further research to determine whether Western Digital is suitable for their own individual portfolios.  (Read the full valuation)

The Mediocre (Defensive or Enterprising and Overvalued)

Psychemedics Corporation (PMD)

Psychemedics Corporation is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the small market cap size, the insufficient earnings growth over the last ten years and the high PEmg and PB ratios, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.53 in 2010 to an estimated $0.58 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 7.73% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.  (Read the full valuation)

Schlumberger Limited (SLB)

Schlumberger Limited is suitable for the Enterprising Investor but not the Defensive Investor, who is concerned by the high PEmg and PB ratios.  The company passes all of the Enterprising Investor’s requirements, though.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $3.47 in 2010 to an estimated $4.62 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 6.34% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.  (Read the full valuation)

The Bad (Speculative and Undervalued or Fairly Valued)

No companies met these criteria this week.

The Ugly (Speculative and Overvalued)

Mr. MarketHospira Inc. (HSP)

Hospira Inc. does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has numerous concerns and is only satisfied with the market cap size and the current ratio.  The Enterprising Investor is similarly situated and is only satisfied by the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation standpoint, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.97 in 2010 to an estimated $0.92 for 2014.  This demonstrated drop in earnings does not support the market’s implied estimate of 24.02% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.  (Read the full valuation)

 

Disclaimer: The author did not hold a position in any of the companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logos taken from either the company website or Wikipedia; this article is not affiliated with the companies in any manner.

 

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